Liquefied Natural Gas prognosiss are highly-structured and capital intensifier in order to protect the investing return that undertakings developers conventionally covered all their hereafter LNG. The past old ages have witnessed a dramatic development in LNG industry which is under metaphases from an baby towards a maturing industry with the on-going procedure of slowing in the universe market, LNG plays an progressively of import function in run intoing the rapid gas demand worldwide by offering its virtues of variegation and flexibleness for procuring gas supply of monetary value signals cross stray parts. Harmonizing to BP 2010 “ So far, LNG accounts for 30.5 % of universe trade volume and the figure is expected to be turning ” .
Over the past five old ages it has became acceptable industry pattern for even contractually committed LNG with a specified finish to be diverted to another market with common understanding of both the marketer and the purchaser. The fiscal inducements to profit from market in efficiency and regional supply-demand motivated market participants to let ad-hoc lading recreations, sharing the net income ensuing from the arbitraging between the several parties.
With a careful survey of the procedure of arbitrage from school of idea: Prof. Dr. Hasret B. and others ; I have been privileged to understand the nature of LNG and why is non neglected. This same survey put up a inquiries: who are the arbitragers, what are the restraints and restrictions they fall, and why arbitrage can neglect to convey monetary values near to the cardinal value which implied by standard theoretical accounts.
However, the focal point of this article on the nature of LNG arbitrage and its theoretical growing in planetary markets reveals theoretical development within a simple theoretical account and besides suggest waies for future research. Harmonizing to Zhurravleva ( 2009 ) , he pointed out why the LNG undertaking is still in being “ In 2007, the Equatorial Guinea LNG undertaking sold its full LNG end product on a FOB ( Freight On Board ) footing to BG for 15 old ages, without integrating a finish clause in the contract ” . Now what she really meant here is that the concern has enabled the purchaser ( BG ) to deviate the ladings and act as collectors ( arbitrager ) , effectual and monetising their bringing. Other important beginnings of flexible ladings are Qatar, Trinidad and Tobago, Algeria and Egypt.
The authoritative finish and the handiness of non-committed transportation capacity are non the lone barrier towards the LNG arbitrage instead than other factors such as ; proficient and market limitations, high dealing costs which hinder LNG recreations. The significance of these barriers varies overtime and differs from market to market ; nevertheless it is of import to understand the aforesaid theoretical importance and the extent to which they may restrain the development of the planetary LNG arbitrage market.
Therefore with a clear observations of “ The Unique Features of the LNG Transporting Market: A Study of Ship-owners Structure and Fleet Distribution ” by Wang, S. et al 2011 ; a common premise refers to the disbursement race in which high frequence bargainers employ LNG trading to put to death orders every bit fast as possible in other to derive an border in trading. This is because LNG arbitrage was viewed as natural conventional development that finally would interpret into more efficiency in the market topographic point as the velocity down to all investors in the markets.
The past old ages of a close informant of how LNG industry put up a dramatic development still remain green in my head boulder clay today. This because I was present making inspirations with mine Late Timothy O. Anyanwu. ; he gave breath to me and nurtured me towards the concern in sub-region at Enugu, Nigeria. From a clear construct of it is being characterised with a high-structured and capital intensive one which is tied with a long-run contracts for old ages or more. He maximized a transparent and profitable one-year return for Oando Nigeria Plc boulder clay nowadays.
1.2 LITRATURE REVIEW
With the general growing of LNG arbitrage research in concern and fiscal undertaking sectors, it would be glare to set a distinguishable relationship or differences between a considerable attending I recent old ages. In some research efforts to travel beyond the undertaking premises about how is being created for several old ages, they focused on point of context from one point of position which uses conversation analysis, such as LNG arbitrage, barrier and other interactive characteristics. It inter-related some research which has focused merely on the description of differences, other work has shown clearly how LNG undertakings reflect and reproduce fiscal differences. Consequently, Zhuravleva ( 2009 ) pointed that the important of barriers towards LNG varies overtime and differ from market to market. He pointed besides that is of import and to the extent to which they may restrain to the development of the planetary LNG arbitrage market.
Harmonizing to Mazighi ( 2003 ) considered that the globalisation of LNG markets requires four conditions to be met ; the natural, the economic, the proficient and the institutional conditions.
Much of the earlier work emphasized laterality. Neuhoff & A ; Hirchhausen ( 2008 ) suggested that assets-specific investings and uncertainness along with the LNG supply concatenation imply high dealing costs. He went farther to indicate that long-run contracts can nevertheless assist to minimise the dealing costs for two parties prosecuting in the committedness. Harmonizing to an empirical analysis of Ruester ( 2006 ) it showed that in response to market deregulating, perpendicular integrating was driven by upstream manufacturers traveling downstream with ownership of transit capacities to work arbitraging possibilities and distribution and power companies traveling upriver to guarantee borders and security of supply.
While some of the more popular work of this type, such as Jensen ( 2004 ) , there are some possible similarities between the oil market and the natural gas market, nevertheless the manner a planetary LNG market will put up is found to be different. The high cost of LNG transit is one of the chief grounds forestalling the LNG market to be every bit flexible as oil market. He went farther to indicate out that ; long-run contracts in LNG have been the vehicle for sharing the big up-front investing hazard characterize LNG undertakings, the short-run trading had been turning fast in recent old ages given the worsening costs along the supply concatenation, the turning diverseness of supply beginnings and relaxation of the conventional stiff industry construction. Therefore, the long term contract still remains a pillar of international trade, and the growing of short-run trade volume and monetary value arbitrage are limited consequently.
Although Zhuravleva ( 2009 ) differentiation is clearly a utile one, it is besides seems apparent that the some utile attacks are by no agencies reciprocally sole. While is of import on one manus, hence, it is of import to concentrate on the development of LNG arbitrage even when there is constrains. It besides pointed out some conversation support on ( P.2 ) clearly there is range with great trade to spread out in the country of this subject research
Is based on embryologic phase of development
Establish more penetration on a clear formation of LNG arbitrage.
Distinguish between LNG arbitrage with other trade activities associating to LNG markets.
This article is based on primary research. It involves three constituents: online questionnaires, interviews, mine experience in the concern in Nigeria and feedback from the presentations of the research mentioning to Zhuravleva ( 2009 ) “ Oxford Institute of Energy Studies ( OIES ) ”
The mark group for the research was carefully selected to supply an informed scope of penetration. Therefore, among the participant were natural gas and LNG bargainers, taking independent advisers, senior figures from several of the major energy companies and publishing houses of LNG diaries and bulletins. The study ‘s sample size is comparatively little due to the extremely specialised nature of the subject, the famine of sure specializers in the LNG arbitrage trade and the trouble in accessing experts. However, the profiles and experience gathered by mine ego and the participants were representative of the best in the sector. The information for the qualitative analysis was obtained with the aid of the online questionnaires.
When all the responses were collected, each participant were interviewed to help in the qualitative analysis of the informations.
2.1 Specifying LNG Arbitrage
Arbitrage is defined as the coincident purchase and sale of the same touchable goods in two different markets for advantageous intent of different monetary values ; but here such arbitrage required no capital and entails no hazard Therefore, mentioning to LNG arbitrage it means a physical lading recreation from one market to another or re-experts of ladings to descry gas market in markets in which gas monetary values are every bit much as high that covers the costs and net income remains. Harmonizing to Zhuravleva ( 2009 ) defined “ LNG arbitrage as a physical lading recreation from one market to another, which offers a higher monetary value ” . He explained further that the recreation of the lading can be regarded as arbitrage if the lading was ab initio committed to the first market and to the initial purchaser in a commercial contract. Two cardinal drivers for arbitrage are commercial and operational.
Commercial Driver: This is the ability to take advantage of monetary value derived function between the markets, which arise due to differing pricing constructions, fluctuations in the comparative balances between supply and demand and market inefficiency.
Operational Driver: This is the fiscal lose minimisation in instance of works outages overfill storage armored combat vehicles or force.
However, advocators of alone universe market for gas has to take into history that arbitrage are dearly-won, and therefore can take merely in some convergence of monetary values between different regional markets but non to the full monetary value. Harmonizing to Ikonnikova ( 2009 ) , “ it makes the market flexible option and allows market participants to benefits from arbitrage chance playing on monetary value differential across regional market ” .
2.2 Models of LNG Arbitrage
These are the three chief theoretical accounts used in LNG trading ;
Models I: Seller – Arbitrage: Here marketer and purchaser are used to bespeak the marketer of LNG lading and the purchaser of the LNG lading. Initial purchaser is the client for whom the LNG has been ab initio contacted, while End Buyer is the buyer of the amused LNG.
Model II: Initial Buyer – Arbitrage: This theoretical account points out that the initial purchaser ‘s market monetary values remain stable due to participants ‘ net incomes from the arbitrage and replaces the LNG by topographic point ladings subsequently. Normally used by Spanish Importers.
Model III: Independent Trader – Arbitrage: In this theoretical account another participant called Independent Trader appears in the dealing. He buys the lading from the initial purchaser ( Seldom from LNG Seller ) and gets the right to deviate the lading to another client offering a higher monetary value. E.g. , Garpron and Gas De France 2004.
2.3 Barriers to the Growth of LNG Arbitrage in Global Market
After a qualitative analysis from the questionnaires of this article, the growing of the LNG arbitrage market implies an addition in the figure of arbitrage minutess yearly and the addition in the volumes that are being diverted one market to another. They are more than 12 barriers towards the growing of LNG arbitrage in planetary market but few will be mentioned here. They are as follows ;
The Price Differential Between Markets is Not Great Enough: Price spread must be great adequate to cover the dealing costs and be a sufficient inducement for the collector, who frequently has to portion the net income with another party. Without a monetary value spread that allows the bargainer to gain, no arbitrage dealing will take topographic point.
Small Number of Players in the LNG Market: If two purchasers are present for dealing in market so an arbitrage trade should be potentially possible. But they are seldom scarce for dealing.
Lack of Price Transparency: Lack of monetary value transparence complicates arbitrage trade and demand adeptness of humor and good connexions between the bargainers. In dealingss to states involved in LNG trade, the US and UK gas market are the most crystalline and liquid in the universe while in Continental European gas market where LNG is of import – Spain, France and Belgium.
3.1 CONCLUSION AND RECOMMENDATIONS
With clear grounds on today ‘s LNG universe, it has been argued that it will drive the universe markets for natural gas from part to alone universe monetary value but with a qualitative observation, the turning function of LNG arbitrage chances between states differ from each other. And at the same clip, the monetary value spread between states besides differs because of its landing cost ( transit cost ) .
We suggest a positive recommendation which could steer the planetary universe at big which is “ UNIFORMITY ” in footings of LNG arbitrage operation. More research demand to be done to enable expand this article aforementioned toward ; its embryologic growing development, clear formation of LNG arbitrage and trade activities associating to LNG markets.
Billingsley, R. ( 2005 ) , Understanding Arbitrage: An Intuitive Approach to Financial Analysis. Wharton School Publishing, US
BP Statistical Review, 2010.
Chabrelie, M. ( 2003 ) A new trading theoretical account for the fast-changing LNG industry, first Asia Gas Buyers ‘ Summit.
Clarkson research services ( 2010 ) Report of LNG Trade and Transport 2010.
Facts Global Energy ( 2008 ) , East West LNG Pricing Comparison: New Trends. New Frontiers, And Future Price Markets, Presented at Gastech, March 12th 2008, Bangkok, Thailand.
Ikonnikova S. , 2009, Strategic theoretical account of LNG arbitrage: analysis of LNG trade in Atlantic Basin, in 32nd International Association for Energy Economics Conference Proceedings.
Institute of Energy Economics, Japan ( 2008 ) , Natural Gas and LNG Supply/Demand Trends in Asia Pacific and Atlantic Markets. Tokyo, Japan.
Jensen, J.T. ( 2004 ) , The Development of a Global LNG Market. Oxford: Alden Press.
Neuhoff, K. , von Hirchhausen, C. , ( 2005 ) Long-term vs. Short-term Contracts: A European Position on Natural Gas.
Ruster, S. , and Neumann, A. , ( 2006 ) Corporate Strategies along the LNG Value Added Chain – An Empirical Analysis of the Determinants of Vertical Integration.
Wang, s. , Notteboom, Theo E. ( 2011 ) . “ The Unique Features of The LNG Transporting Market: A survey Of ship-owners ‘ Structure And Fleet Distribution ” . Paper presented at IAME 2011, Santiago de Chile, 25-28 October 2011.World Bank Commodity Price Data, March, 2012.
Zhuravleva. P. “ The Nature of LNG Arbitrage, and an Analysis of the Main Barriers for the Growth of the Global LNG Arbitrage Market ” , Oxford Institute for Energy Studies, NG 31, June 2009.
Table OF CONTENTS
Cover Page I
Key words two
I.1: Introduction 1
: LITERATURE REVIEW 4
: Methodology 5
2.1: Shaping LNG ARBITRAGE 6
Commercial Driver 7
Operational Driver 7
2.2 Models of LNG Arbitrage 8
2.2.1 Model I: Seller – Arbitrage 8
2.2.2 Model II: Intial Buyer – Arbitrageur 8
2.2.3 Model III: Independent Trader – Arbitrage 9
2.3 Barriers to the Growth of LNG Arbitrage Global Market 9
3.1 CONCLUSION AND RECOMMENDATION 9